Did you ever get a bad grade on a report card? And,were you tempted, on the way home, to change that D to a B and save yourself the grief your parents were bound to dish out? And if you did change the grade, was that a sign that you were destined for a life of fraud?

These were questions asked by Pat Huddleston, a professional speaker, author and CEO of Investor’s Watchdog LLC, a due diligence company that conducts investor fraud prevention investigations. At the ECOA conference in September, Huddleston spoke about financial fraud schemes and the people who devise and profit from them.

Scam artists and reckless financial advisers often prey on baby boomer employees and retirees, getting access to them through a company's HR department. So it makes sense for HR practitioners to be alert and knowledgeable about spotting them. But it’s not easy, as demonstrated by the Wayne McLeod fraud case we blogged about two weeks ago.

Sociopaths

“One in 25 people is a sociopath, born without a conscience,” he says. “That’s four per cent of the population,” he adds.

“Most sociopaths are not serial killers. Some of them are highly functional. They wind up getting degrees; they wind up earning licenses; they wind up qualifying to operate in the industry; and they develop great people skills,” he says. “They can convince people of anything and they can steal from your grandmother and sleep like a baby. Those people are out there.”

Huddleston recounted walking home from school with a bad report card and contemplating how easy it would be to change a D to a B. Millions of high school students have had that same thought.

Bunglers

“Well that thought also occurs to financial advisors who have not done so well with their clients’ money,” he says. “They change that D to a B. Have they become Bernie Madoffs? They’ve just identified themselves as humans,” he says.

It’s a human characteristic to worry about the consequences of poor performance. And it’s how many Ponzi schemes are started. “The first impetus is something we have all shared,” said Huddleston. “We’ve messed up and didn’t want anybody to know about it.”

Bunglers are people who are incompetent, but lack the capapcity to recognize their own incompetenece. “There’s no shortage of people who make their money by handling other people’s money, but who are just no good at it,” said Huddleson. “They just can’t do it. But they lack the capacity to understand it.”

Be a Skeptic

The problem lies in how to identify these people. It's difficult to pick out the sociopaths and the bunglers who are out to defraud. They may be so polished and practiced that they fool even the most savvy investor.

Huddleson recounted stories of fraudsters who have fooled knowledgeable investors with many years of experience. Today’s criminals know that investors won’t fall for something that looks too good to be true, so they create products that sound just a bit better than average. They’re smart enough to make it believable, said Huddleston.

So, how do you determine ahead of time who’s going to try to change the D to a B? How does the average investor spot the crook before investing his or her fortune in a Ponzi scheme? Start by treating every investment scheme as a possible fraud and research ways to defeat your natural tendency to fall for the biases that make us all human.